Donating Money From Your IRA

Every week Kelley Greene’s Focus on Retirement Segment in the Wall Street Journal is excellent, this week is no exception.  If anyone has any money left their IRA and would like to donate it to a charity…here are some details.

http://online.wsj.com/article/SB122489075823068591.html

Basically what it says is if you are 70 1/2 or older you can donate up to $100,000 from your IRA tax free to a qualified charity.  The same does not hold for a 401(k) or 403(b).

When Converting a Traditional IRA to a Roth IRA in 2010 – Beware of the Glitches

Funding a tax-deductible Traditional IRA will garner you an immediate tax break, investments grow tax deferred, but withdrawals are taxed as ordinary income.  A Roth doesn’t offer an immediate tax deduction  but investments grow tax deferred and withdrawals are tax free.  Unfortunately, if you are covered by a retirement plan at work and make more than $116,000 if you are single and $169,000 if you are married filing jointly – you can’t contribute to either.

Non deductible IRAs in the past were a very un-popular investment vehicle.  Contributions are not deductible on your tax returns, they grow tax deferred but are withdrawn at regular income tax rates.  However, in 2006 a new law was passed that said in 2010 individuals who were restricted from contributing to a Roth IRA are allowed to convert their non deductible and deductible Traditional IRAs to Roth IRAs regardless of salary. 

Converting your non deductible to a Roth in 2010 without paying additional taxes is an excellent strategy.  However, be careful not to trigger more tax liability!  Lets say you have $100,000 in a regular Traditional IRA and $25,000 in a non-deductible account.  You would owe taxes on the $21,000 because it would be assumed that the $25,000 was coming pro rata from the whole IRA rather than just the non deductible IRA.  You don’t want to pay taxes twice so what can you do? 

Solution #1: Roll the deductible portion of your Traditional IRA into a 401(k) if allowed.  Then when you go to roll over the non deductible portion into a Roth you will not be double taxed!

Solution #2: Even if you have a large IRA that you don’t want to mingle with non deductible IRA money to be converted, your spouse may not.  If not, your spouse can fund a non deductible IRA until 2010 and then convert it to a Roth.

To Rollover or Not To Rollover…That Is The Question

There are a million and one things to think about when you leave a job for a new one.  New office dynamics, tasks and responsibilities, even new lunch options!  There is one item that comes with leaving an old job that often gets overlooked.  What to do with your previous company retirement account, your 401(k) or 403(b).  You have three options:  rollover your old account into an IRA account, keep your money in your previous employer’s plan or rollover the old account to your new employer’s plan.

What is one to do?  The answer to this question depends on a few things!  I present the pros and cons below. 

Benefits of an IRA Rollover:

Your Old Plan May Be a Bad Deal – It is truly amazing how many bad plans are out there.  Some plans impose atrocious expense rates, wrap charges and other needless costs.

Expand Your Investment Options – Most plans, even the good ones, restrict their participants to a few investment options. Roll your money over into an IRA and you have unlimited options.

Consolidate Your Accounts – By consolidating your old plans into a single IRA you can manage your portfolio in a single account and get complete picture of your investments all in one place. Even more importantly, by rolling out several accounts into one you can sometimes save on expenses.

Avoid the Money Market Trap – In some cases, if your former employer is unable to make contact with you and your previous investment choices in your plan are no longer available, your investments may be placed in some sort of stable principal fund. If you forget to follow up, it may be years before you realize that your hard earned retirement investment is earning 2% a year.

Tracking Your Money – Many plans do not use ticker symbols and are not easily trackable. In many cases this is true for companies whose plans are managed by an insurance company (ING, Hartford etc.) By rolling-over your plan into an IRA you will be able to invest your money in funds for which a public price is posted on a daily basis.

Index Investing – It is amazing that after all this time, most retirement plans offer only minimal index fund investment options.  

Benefits of Leaving Your Money in Your Old Plan:

Tax Benefits If You Hold Company Stock – This is beyond the scope of this article but if you have company stock in your company retirement plan, contact a financial advisor before initiating a rollover. 

Benefits of Rolling Over Into Your New Employer’s Plan:

Ability to Borrow Penalty Free – This is a highly unadvisable strategy but it is a benefit of an employer plan versus an IRA.

Penalty Free Withdrawals at Age 55 – You must wait until age 59 1/2 to make penalty-free withdrawals from an IRA.  To do so, you must terminate your employment no earlier that the year in which you turn age 55.

 

The decision whether or not to rollover funds is not always cut and dry.  Do your research and choose wisely!  And remember, a rollover contribution doesn’t count toward annual IRA contribution limits — you can still make your regular contribution.  Also, don’t forget to keep investing in your current employer’s retirement plan — at least enough to collect the full amount of your current employer’s matching contributions. Your retired self will thank you.

Please contact Dollars & Sense Education to bring our seminars to your company or organization!

d_s_education_logo.jpg

Dollars & Sense Education – Raising Your Financial IQ!
http://www.daseducation.com
nicole@daseducation.com
215-499-3834

Retirement Accounts for The Self Employed (Part 5 of 5) – What Is The Best Plan For You?

Independent’s Week is officially over!  I hope all of the self employed people out there enjoyed my detailed blog entries about the differences between all of your options for retirement plans.  In the chart below I summarize your options, key details and the pros and cons of each plan.  Enjoy.

untitled2.GIF 

For the rest of this series:

https://daseducation.wordpress.com/2007/10/08/a-retirement-accounts-for-the-self-employed-part-1-of-5-the-sep-ira/

https://daseducation.wordpress.com/2007/10/09/retirement-accounts-for-the-self-employed-part-2-of-5-the-solo-401k/

https://daseducation.wordpress.com/2007/10/10/a-retirement-accounts-for-the-self-employed-part-3-of-5-the-simple-ira/

https://daseducation.wordpress.com/2007/10/11/retirement-accounts-for-the-self-employed-part-4-of-5-the-keogh/

 

Please contact Dollars & Sense Education to bring our seminars to your company or organization!

d_s_education_logo.gif 

Dollars & Sense Education – Raising Your Financial IQ!
www.daseducation.com
nicole@daseducation.com
215-499-3834

Retirement Accounts for the Self Employed (Part 4 of 5) – The Keogh

Ok folks, another entry for the self starters out there!  Part 4 of how to sock your money away for retirement for the self employed.  Non self employed folks, come back next week and I’ll some good stuff for you!  So let’s do this… Part 4 – The Keogh. 

Keogh plans are the self-employed equivalent of corporate retirement programs.  They come in two basic flavors: profit-sharing plans and defined benefit pension plans

Annual contributions to Keogh profit-sharing plans are based on a percentage of self-employment income or compensation and subject to a $45,000 ceiling.  A plan document must be drafted in Year One (this may cost a couple hundred bucks), and the IRS demands an annual report (you can probably do this yourself).

Keogh defined benefit pension plans are designed to deliver a targeted annual retirement benefit, which can be as high as $180,000.  Each year’s contribution must be calculated by an actuary — the exact amount depends on your income, the target benefit, years until retirement and anticipated investment returns.  Annual actuarial fees and the required IRS report can run up to a couple grand.  Another negative: You’re locked into making the actuarially determined contribution each year.  However, if you make good bucks and are over 50, a defined benefit plan may be worth all the trouble — because it permits much bigger contributions than any other type of program.  If you’re younger, go with a SEP, profit-sharing Keogh or Solo 401(k).

dbrn367l.jpg

To put this entry in perspective, the Keogh plan is quite complicated and probably not appropriate for most self employed folks out there.  Keogh setup and ongoing fees for paperwork and for professional guidance are more suited to self-employed individuals with established businesses and consistent incomes.  One reason behind this limited parameter is that once you open a determined benefit contribution plan, you’re locked into that contribution every year

Do I Qualify For A Keogh?

Any sole proprietors, partnerships, LLCs, and anyone with self-employment income.

Are Keogh Contributions Pre or Post Tax?

Keogh plan contributions are deducted from pre tax income and contributions and interest income are tax deferred until withdrawal.

Where Do I Set Up a Keogh?

A Keogh plan is something you REALLY want to talk to a live financial advisor about.

How Much Can I Contribute Annually to a Keogh for myself?

You will encounter the same $45,000 ceiling for contributions to a Keogh profit-sharing plan but you can set a ceiling as high as $180,000 for a defined benefit Keogh plan.

Why Not Just Open a Traditional or Roth IRA?

Do Both!

When Do I Set This Up?

If you are establishing a plan for the first time, complete the Adoption Agreement(s) by December 31 (Simplified Keogh plan) or your fiscal year-end (Standard PSP/MPP plan), and you will be eligible for a deductible contribution for this year.

What If I Already Participate In My (Other) Employers Plan?

I was not able to get a definitive answer about this.

Do I Have to Put Away the Same Amount of Money Every Year?

With a profit-sharing plan you can vary annual contributions from 0 – 25% of compensation per year or skip a year if business conditions change.

With a defined benefit pension plan you make fixed contributions each year (1 – 25% of compensation) as your commitment to retirement benefits but once you select a percentage, you must contribute that same percentage each year, no more and no less. This contribution cannot be changed unless you amend the plan.

What If I Have Employees?

I was not able to get a definitive answer on this one!

Next Stop!

In Part 5 I will sort out what plans make sense for your individual situation!

For the rest of this series:

https://daseducation.wordpress.com/2007/10/08/a-retirement-accounts-for-the-self-employed-part-1-of-5-the-sep-ira/

https://daseducation.wordpress.com/2007/10/09/retirement-accounts-for-the-self-employed-part-2-of-5-the-solo-401k/

https://daseducation.wordpress.com/2007/10/10/a-retirement-accounts-for-the-self-employed-part-3-of-5-the-simple-ira/

Please contact Dollars & Sense Education to bring our seminars to your company or organization!

d_s_education_logo.gif 

Dollars & Sense Education – Raising Your Financial IQ!
www.daseducation.com
nicole@daseducation.com
215-499-3834

Retirement Accounts for the Self Employed (Part 3 of 5) – The Simple IRA

More Retirement Accounts for the Self Employed! Cmon.  I know its dry, I know.  But its like eating vegetables, its goooooooood for you.  He He.  The good news is if you are not self employed, you don’t need to bother reading.  If you are self employed – read on brothers and sisters!  Don’t you want to learn the best way to shelter your income?  If you have employees, don’t you want to help them save for retirement?  So let’s go.  Part 3 – The Simple IRA.  Part 4 of this series will describe the KEOGH and the last entry, Part 5, will discuss what options are appropriate for you according to the kind of business you have and your goals!

ksmn1874l.jpg

Do I Qualify For A Simple IRA?

Employers are eligible to establish and maintain a SIMPLE plan only if the employer:

  1. No more than 100 employees (including self-employed individuals) who earned $5,000 or more in compensation during that year; and;

  2. No other qualified retirement plan, 403(b), or SEP at the same time.

Pre or Post Tax Contributions?

Simple IRAs are pre-tax contributions. 

Where Do I Set Up a Simple IRA?

The usual: Vanguard, Fidelity, ETrade, TRowe Price, etc.

How Much Can I Contribute Annually to a Simple IRA for myself?

Max contribution: up to $10,500 (2007) as an employee an an employee for a total of $21,000 (2007).  If you are 50 or over, you can contribute a total of $26,000 (2007) of PRE-TAX money.

Why Not Just Open a Traditional or Roth IRA?

Do both if your income makes you eligible for a ROTH IRA or Traditional IRA.

When Do I Set This Up?

Deadline to open an account is Oct 15th of the reported tax year.

What If I Already Participate In My (Other) Employers Plan?

Make sure you stay under the annual limits for total contributed to all employer sponsored plans!  So between your SIMPLE IRA and the other employer’s 401K your own contribution cannot exceed a total of $15,500 for 2007 or $20,500 if you are 50 or over. 

Do I Have to Put Away the Same Amount of Money Every Year?

No.

What If I Have Employees?

The SIMPLE IRA has a mandatory employer contribution requirement. This contribution requirement can generally be made as follows:

  1. The employer can make a dollar-for-dollar matching contribution on the first 3% of compensation that the individual elects to defer, or;
  2. The employer can make a nonelective contribution of 2% of each employee’s compensation for all eligible employees. You may choose to give the nonelective contributions only to eligible employees who make $5,000 or more in the year.
  3. Employees can contribute 100% of their annual compensation up to $10,500 ($13,000 if age 50+) for 2007.

 Anything Else?

There are such a thing as SIMPLE 401Ks but there is no benefit to this plan as you still have the lower SIMPLE limits $10,500 (2007) and more administration.

Next Stop!

In the next installment of this series (Part 4 of 5) I will describe another kind of retirement account for the self-employed – The KEOGH!  In the Part 5 I will sort out what plans make sense for your individual situation!

Other great blog entries and articles on Simple IRAs:

http://www.irs.gov/retirement/article/0,,id=111420,00.html

For the rest of this series:

https://daseducation.wordpress.com/2007/10/08/a-retirement-accounts-for-the-self-employed-part-1-of-5-the-sep-ira/

https://daseducation.wordpress.com/2007/10/09/retirement-accounts-for-the-self-employed-part-2-of-5-the-solo-401k/

Retirement Accounts for the Self Employed (Part 1 of 5) – The SEP IRA

It seems like October is Independent’s Month at Dollars & Sense Education! I just helped a client who is a Realtor (1099 employee) rollover a 401K from an old employer into a SEP-IRA with Vanguard. If you are self employed or have a side business you can start your own retirement accounts.

vsh0096l.jpg

When you are self employed there are retirement vehicles that are made specifically for you and can allow you to sock away alot of tax deferred moolah. Independent contractors, sole proprietors and business owners can sign up for:

  • Simplified Employee Pension IRA (SEP-IRA)
  • Solo 401k’s
  • Savings Incentive Match Plan for Employees IRA (SIMPLE IRA)
  • Keogh Profit-Sharing Plan or Keough Defined Benefit Plan

Part 1 of this series will describe the SEP IRA. The next three entries will describe the other options and the last entry will discuss what options are appropriate for you according to the kind of business you have and your goals!

Do I Qualify For A SEP IRA?

To qualify you must have self-employment income. Self-employment income consists of net profits from a Schedule C or Schedule F on your tax return, or guaranteed payments from a partnership. If you run an S-Corporation, your corporation will have to set up the SEP-IRA and deduct your contributions from your W-2 salary. You must open and contribute money to a SEP-IRA plan by the due date of your tax return.

Where Do I Set Up a SEP IRA?

SEP IRAs can be setup with the same companies that provide Traditional IRAs and ROTH IRAs although the fees will vary slightly from traditional IRA and ROTH IRAs.

How Much Can I Contribute Annually to a SEP IRA for myself?

Your annual maximum contribution to a SEP-IRA is 20% of your net earnings minus self employment tax from self-employment income or $45,000 (for 2007), whichever is less.

Why Not Just Open a Traditional or Roth IRA?

Do both! You can sock away money in both a SEP IRA, ROTH IRA and a Traditional IRA. You can still contribute to a Roth IRA or a Traditional IRA if your modified gross income is under approved limits. Your employee contribution is capped at $4,000 regardless of the type of IRA you use. Where you sock away the extra dough is the employer contribution (up to $45,000) in the SEP IRA.

What If I Already Participate In My (Other) Employers Plan?

You can have your cake and eat it too! Sock your money away in a SEP IRA and a 401K!

When Do I Set This Up?

This can be setup until you file your taxes, including tax extensions.

Do I Have to Put Away the Same Amount of Money Every Year?

No.

What If I Have Employees?

A SEP allows for a contribution of up to 25% of your employees’ salary per year at a maximum of $45,000 (2007). An employee is defined as at least 21 years old and must have worked for you 3 out of the last 5 years. Contributions to employees SEP IRA MUST BE UNIFORM – that is if you contribute 20% to one employee’s account, you must contribute 20% to all.

Employees cannot contribute to their SEP, unless they are self employed obviously. Employees can contribute to a Roth IRA or a Traditional IRA if their modified gross income is under approved limits. If in the calendar year, the employer doesn’t contribute to the SEP IRA, the employees can contribute to the Traditional IRA regardless of income.

Summary

In short, if work for yourself take full advantage of the tax benefits that affords you. A SEP IRA allows you to defer a significant portion of your retirement savings from taxes. Don’t let Uncle Sam get more than his fair share!

In the next installment of this series (Part 2 of 5) I will describe another kind of retirement account for the self-employed – The Solo 401K!

Other great blog entries on SEP IRAs:

http://www.bargaineering.com/articles/primer-on-self-employment-taxes-or-why-sep-iras.html

http://www.sitelead.com/blog/how-a-sep-ira-can-cut-your-taxes/2007/04/05

http://www.fivecentnickel.com/2006/10/19/opening-a-vanguard-sep-ira-and-executing-a-direct-rollover/

http://taxes.about.com/b/a/257220.htm

Please contact Dollars & Sense Education to bring our “Financial Health 101 seminar to your company or organization!

Dollars & Sense Education – Raising Your Financial IQ!
www.daseducation.com
nicole@daseducation.com
215 – 499 – 3834